How a Texas Partnership Agreement Can Help You Avoid Disputes (And What to Do When Disputes Arise)
Going into business with a relative, friend, or colleague is exciting. As optimistic as you can be for your venture, be practical, as well. Things can go wrong down the road. You never know what circumstances might arise one, five, or ten years into the future.
While you can’t predict what will happen, you can prepare with a comprehensive Texas partnership agreement.
Types of Partnership Agreements in Texas
Texas lets professionals enter into a variety of partnerships. Your roles dictate what type of agreement you need.
A General Partnership Agreement (GP) in Texas
In this type of arrangement, two or more general partners go into business for profit. The GPs treat the partnership’s income as personal income. Each partner is equally responsible for the partnership’s debts unless the agreement proportions income and debts differently. State franchise taxes don’t apply to GPs. The law doesn’t require you to put a GP agreement in writing, but you should.
Texas law doesn’t require you to register with the Secretary of State (SOS) other than the Assumed Business Name Registry if your partnership operates under a business name.
A Limited Partnership Agreement (LLP) in Texas
There are general partners and limited partners with different rights and duties in a Texas limited partnership agreement. A limited partner is only responsible for the investment they made into the business. General partners are responsible for the partnership’s debts and control the day-to-day operations. Both general and limited partnerships treat income as personal income.
You must file a Certificate of Formation – Limited Partnership, and state franchise taxes apply to LPs.
A Limited Liability Partnership (LLP) Agreement in Texas
This arrangement offers legal protections for partners in an existing general partnership. The partners can take the additional step of registering with the SOS as an LLP. The benefit of filing for this status is that the partners receive personal liability protection from business liabilities. State franchise taxes apply to LLPs. Professionals, like lawyers, architects, accountants, and dentists, often form LLPs.
A Limited Liability Limited Partnership (LLLP) Agreement in Texas
Like an LLP, this status gives general partners personal liability protection. Limited partners remain liable only up to their investment amount. Again, state franchise taxes apply to LLLPs. This partnership arrangement is relatively new compared to the others and not recognized in every state.
What to Address in Your Written Partnership Agreement
Partnership agreements aren’t required, but a written agreement is the best way to avoid problems. You and your partners can take the time to define your roles, rights, responsibilities, and expectations.
You can find Texas partnership agreement templates online, but it’s wise to consult an experienced lawyer. Prewritten agreements won’t speak to your specific situation, needs, and goals.
Your contract should state the type of partnership you’re forming and its purpose. You don’t have to be overly specific.
Each partner should understand their role. What is each partner’s daily or broader responsibilities concerning the business? Who is in charge of daily operations? Who will make significant decisions for the company, such as hiring or dismissing employees, purchasing assets and software, and hiring consultants or accountants? Who has the right to bind the business contractually?
Income and Debts
How will the partners distribute the business’s income, profits, and losses among themselves? Partners may agree to an even split, but that’s not required. If certain partners invest more money or time into the business, they may receive a greater portion of the profits. This distribution should be transparent before moving forward with any venture. It also should be clear when the business pays out profits.
The partnership’s finances need to be kept and documented separately from each partner’s personal finances. That includes separate bank accounts and financial statements. Decide which partner is in charge of handling daily financial matters, the business’s accounting method, and how you’ll handle business valuations.
A Partner’s Death or Withdrawal
What happens to a partner’s interest in the business if they pass away? Will the business live on or terminate? Even if you and your partners are young, prepare for a partner’s unexpected passing.
There may come a time that a partner wants to retire or leave the partnership for other personal or professional reasons. It’s best to have a process in place for these occasions, including a buy-sell agreement.
A Partner’s Divorce
Personal and family businesses can create a bone of contention during a divorce. Put in place measures to keep the business separate from a partner’s marital finances as much as possible.
There may come a time in which you want to bring in new general or limited partners. Your agreement should address how the existing partners will agree on this. Prepare for disputes over whether the business should hire someone as an employee or consultant versus bringing them on as a partner.
It would be naive to think you and your partners will never have a business disagreement. Outline procedures for handling significant disagreements, disciplinary issues, or breaches of the partnership agreement. You can set out a voting system or a system of checks and balances. You may agree to a mediation or arbitration clause for significant disputes outside of litigation.
The last thing you want is for a partner to become a competitor suddenly. Work with a lawyer to carefully craft a binding non-compete agreement.
Dissolving the Partnership
No one enjoys thinking about the end while at the beginning. But it’s good for partners to consider when and how they may want to dissolve the business. Preparing for this can quell disputes before they arise. It also may be that your partnership has a set goal, and once you achieve it (or it becomes impracticable), you agree to end the business relationship.
Are You Dealing with a Partnership Dispute in Dallas?
Despite your best efforts, you and your partners might not see eye to eye and may struggle to figure out how to move forward. You might worry about involving a lawyer. Will that make matters more contentious? Often, the opposite is true. An experienced business attorney can review the situation and advise you of the best next steps.
If you have a partnership agreement, revisit what it says about disputes. Make a good faith effort to resolve the matter through the process outlined in the contract. We often receive calls from partners operating without an agreement or a shallow agreement that doesn’t address major disputes. When there’s no process in place, we explain our options.
Sometimes, partners can clear up disputes with a conversation. Other times, you and your partners might benefit from mediation or arbitration. We can advise you of your choices depending on the circumstances and your wishes, including whether you hope to withdraw from the partnership, terminate the partnership, or continue with the same or different partners.
More often than not, our partnership clients hope to avoid litigation. We are thorough in our attempts to resolve disagreements without going to court. However, we offer candid advice when litigation is the best step to protect your interests. We have extensive litigation experience and can help you determine which option is best for you and your business.
If you wish for the partnership to move forward and have been operating without a contract, now is the time to work with an experienced Dallas law firm to craft a thorough and effective Texas partnership agreement. You might not have avoided this dispute, but you can better prepare for the future.
To talk with us about negotiating a partnership agreement in Texas or handling a partnership dispute, reach out to Wood Edwards at 214-382-9789 or contact us online.